Impact of New Stress Test for Uninsured Mortgage Applicants

The latest round of mortgage regulations will create a “stress test” for everyone applying for a mortgage from a federally regulated lender to finance their home. The Office of the Superintendent of Financial Institutions, or OSFI, is an independent Government of Canada agency reporting to the Minister of Finance and is the sole regulator of Canadian banks and the primary regulator of insurance companies, trust companies, loan companies and pension plans in Canada. As of January 1st, 2018, even those mortgage applicants who have a down payment of 20 per cent or more will be required to pass a stress test to ensure that they can handle their mortgage payments if rates go up. This is all part of a series regulatory changes aimed at putting the brakes on the Canadian housing market, which previously included a stress test for buyers with less than a 20 per cent down payment, an increase in the cost of mortgage loan insurance, and a 15 per cent tax on foreign buyers in British Columbia and Ontario.

What Is the New Mortgage Stress Test?

Currently, anyone with a down payment on their home of more than 20 per cent of the home’s value doesn’t require mortgage insurance and is considered an ‘uninsured borrower.’ As of October 16, 2016, anyone with a down payment of less than 20 per cent, has been required to undergo a stress test of their finances, judged against the five-year-standard mortgage rate, even though many lenders offer much lower mortgage rates.

Under the new regulations, imposed by the OSFI and taking full effect on January 1st, 2018, uninsured borrowers, with more than a 20 per cent down payment, will also need to pass a similar financial stress test:

Under OSFI’s new rules, people would have to show they can afford their mortgage payments at either the five-year average rate posted by the Bank of Canada, or two percentage points higher than whatever deal they were able to negotiate — whichever measurement is higher. – CBC

The government’s aim is to reduce the amount of debt, including mortgage debt, that consumers are acquiring as we’ve seen record high debt-to-income ratios in the last few years; however, the pace of regulatory changes must also be considered, as these changes can have a real and immediate impact on many homeowners and potential buyers.

How Will The New Stress Test Affect Mortgage Applicants?

The latest regulatory changes will likely impact certain market segments more than others, such as first-time home buyers who may be using a family gift for a higher down payment, and counting on increased salaries, as they progress in their careers, to afford their mortgage payments, even with the prospect of rising interest rates over the long-term.

Industry experts suggest that another segment likely to be highly impacted, will be current homeowners looking to upgrade, known as ‘move-up buyers,’ as they will no longer be able to qualify for a mortgage on their dream nest:

Royal LePage CEO Phil Soper agreed that move-up buyers “will be [the] primary victim of these new regulations.” Because the new lending rules will likely mean buyers can afford less house, they could find themselves unable to afford the next rung on the property ladder. Then it becomes a question of whether they want to move at all, he said. – Toronto Star

Although the intent of these regulations is to help insulate consumers from acquiring significant new debt that they might not be able to afford, this rule change could put the squeeze on current homeowners relying on home equity for debt consolidation on other high-interest financial products, such as credit cards. Many such individuals are feeling the pressure to lock into a new mortgage before the new rules come into effect:

If folks can’t use their home equity to easily consolidate high-interest debt, they could be facing a painful interest-cost burden or even insolvency. For these people, their best shot at getting great mortgage rates and terms may be in the next month or so. – The Globe and Mail

Many high-debt-ratio borrows will still likely be able to find lenders to approve them, as most provincially regulated lenders are not bound by the OSFI’s new rule; however, if lenders know that you can’t get approval at a bank, they are more likely to charge a rate premium anywhere from 0.10 to 1.00-plus percentage points, known in the mortgage industry as “risk-based” pricing.

The Clock is Ticking… Fast for Uninsured Mortgage Applicants

The OSFI has indicated that these new rules will take full effect as of January 1st, and will apply to all new mortgages in the new year. Banks should honour pre-approvals under the old rules, until those pre-approvals expire and mortgages that have already been approved will not be affected, regardless of the closing date. However, for pre-approvals issued between Oct. 17 and Dec. 31, 2017, the rules may vary by lender, “This is because… where possible institutions are encouraged to comply with the new rules as soon as they can” – Globe and Mail.

New Rules Likely to Further Dampen the Housing Market

We’ve already witnessed a significant slowing of home price increases in key markets like the Toronto area, which peaked at a 33 per cent, year-over-year price increase in April and dropped to a 2.6 per cent year-over-year monthly price increase in September, indicating that the previous changes have done their job in slowing the housing market; prompting some stakeholders, such as OREA to suggest that this latest rule change is overkill:

The Ontario Real Estate Association (OREA) issued a statement calling the OSFI changes “overkill” that “will hurt middle class families and punish careful savers most… It’s time for governments to hit the brakes on more demand side policy interventions and take a wait and see approach,” said OREA. – Toronto Star

Hatch Can Help You Navigate These Changing Mortgage Waters

At Hatch, we understand that every dollar you can save on your mortgage payment is a dollar you can put toward a better use, such the home renovation you’ve been thinking about, or the vacation that you deserve. That is why we work hard to offer some of the best mortgage rates in Canada, with terms suited to your specific needs, in the context of rapidly changing rules and regulations in the Canadian mortgage industry. Simply fill out our Online Mortgage Application and let us get cracking on securing the right mortgage for your dream nest today!